Question

Consider an asset that costs $501,600 and is depreciated straight-line to zero over its 9-year tax life. The asset is to be used in a 3-year project; at the end of the project, the asset can be sold for $62,700.

  

Required :

If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your intermediate calculations.)

$157,795.00

$165,684.75

$149,905.25

$40,755.00

$1,138,017.00

Answer 1

Answer is $157,795.00

Cost of Asset = $501,600
Useful Life = 9 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $501,600 / 9
Annual Depreciation = $55,733.333

Depreciation for 3 years = 3 * Annual Depreciation
Depreciation for 3 years = 3 * $55,733.333
Depreciation for 3 years = $167,200

Book Value at the end of 3 years = Cost of Asset - Depreciation for 3 years
Book Value at the end of 3 years = $501,600 - $167,200
Book Value at the end of 3 years = $334,400

Salvage Value = $62,700

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * Tax Rate
After-tax Salvage Value = $62,700 - ($62,700 - $334,400) * 0.35
After-tax Salvage Value = $62,700 + $95,095
After-tax Salvage Value = $157,795.00